Alter ego trusts – a company law analogy

The alter-ego concept has been debated at some length in the context of trusts. I wrote about it two issues ago in an article entitled “The Alter Ego Doctrine in South Africa” (issue 179, 9 March 2012).

A reader who had his legal training in South Africa sent a letter to NZLawyer about the article in which he criticised the Judges for their understanding of the law (issue 180, 23 March 2012, page 4).

He went on to speak about my supposed philosophy of the law:

“I have always understood Mr Grant to advocate against unnecessarily importing concepts from other areas of the law and applying them to trusts. I respectfully suggest that the concept of ‘piercing’ the veil … should be left where it belongs in company law.”

This is a healthy debate, and my article today involves a recent company law case from England, Antonio Gramsci Shipping Corporation & Ors v Stepanovs [2011] EWHC 333 (25 February 2011), a decision of the Commercial Court in London. It concerned a dispute involving the use of various entities to dishonestly siphon profits from a ship chartering business.

Justice Burton referred at [3] to the words of Justice Gross in an earlier decision in favour of the claimants (Claim No: 2008 Folio 1324), who had found that the senior executives who were responsible for devising the scheme “had or are to be taken as having had effective control” of the chartered fleet. Justice Burton added that the arrangement involved a “puppeteer” and “puppets”.

Now the term “effective control” is conventionally used in trust law to signify the existence of a sham trust, as is the analogy of a “puppeteer” and “puppets”. (A puppeteer has “effective control” over his or her puppets and can do with them whatever he or she wants.)

This was another case where a claimant sought to pierce the corporate veil and hold the puppeteer jointly and severally liable for losses. And the losses were considerable – about US$100 million.

Justice Burton also referred at [6] to the following passage, from Justice Beatson’s earlier decision on 17 November 2010 granting the claimants a freezing order:

“[W]here there is a good arguable case that the requirements for piercing the corporate veil have been satisfied and that the Defendant is the alter ego, or one of the alter egos of the Corporate Defendants, there is also a good arguable case that he should be regarded as stepping into their shoes so that the acts of those Corporate Defendants are seen as his acts.”

Another judgment on which Justice Burton relied, at [13], was that of Sir Andrew Morritt VC in Trustor AB v Smallbone & Ors (No.2) [2001] 1 WLR 1177 at 23:

“In my judgment the court is entitled to ‘pierce the corporate veil’ … if the company was used as a device or façade to conceal the true facts, thereby avoiding or concealing any liability of those individual(s).”

Justice Burton went on to say “it is quite clear that that is exactly what ... occurred here” (at [14]).

The Judge accepted at [27] that “the puppeteer can be made liable, as a party to the contract, but that as a matter of public policy he cannot enforce the contract.” (His statement that a puppeteer “cannot enforce the contract” brings to mind Lord Hoffman’s statement in Standard Chartered Bank v Pakistan National Shipping Corp & Ors (Nos 2 and 4) [2002] 3 WLR 1547 (HL) at [22], that “No-one can escape liability for his fraud by saying ‘I wish to make it clear that I am committing this fraud on behalf of someone else and I am not to be personally liable’”.)

Justice Burton said at [28] that “[t]he puppet company is not a sham”, and that a better analogy is that “of the curtains being pulled back to reveal the puppeteer and the puppet”.

Justice Burton’s decision has subsequently been criticised by Justice Arnold in VTB Capital Plc v Nutritek international Corp & Ors [2011] EWHC 3107 (Ch), but for the purposes of this article, I postulate that Justice Burton’s decision may be correct.

Assuming it to be correct, the important question is this: should the alter ego concept stop at the shoreline of company law or should it wash into the law of trusts? Mr Thompson suggests that it is not appropriate to “import concepts from other areas of the law and apply them to trusts”.

I might agree with this if the concept could logically be confined to one area of the law. However, in the case of the ‘alter ego’ concept, I am not clear how, as a matter of principle, if it can apply to company law, it ought not to apply to other areas of the law. If A says that a business entity is controlled by B when it is not, because B is purely the alter ego of A, why should the concept be confined to company law? Why should it not apply to the law of trusts and elsewhere?

The principles that govern our laws should be consistent and fair.

The purpose in writing on this theme today is not to say that the alter ego concept is a valid doctrine in the law of trusts. Rather, that where a Court finds that a trust that is nominally governed by A, B and C is in truth the puppet of A, who can do whatever he or she likes with it, the Court should consider the most appropriate means of revealing the truth about the trust’s management, and ensuring that the Court is not deceived by a doctrine that says form should prevail over substance.

If, in the context of that debate, the concept of an alter ego trust may have a place, then it is a doctrine that I believe ought not to be discarded from consideration.

For information about Anthony Grant, see www.anthonygrant.com

NZLawyer \\ issue 181 \\ 5 April 2012